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SEAC > SEC Filings for SEAC > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for SEACHANGE INTERNATIONAL INC

Form 10-Q for SEACHANGE INTERNATIONAL INC


6-Jun-2014

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains or incorporates forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. The following information should be read in conjunction with the unaudited consolidated financial information and the notes thereto included in this Form 10-Q. You should not place undue reliance on these forward-looking statements. Actual events or results may differ materially due to competitive factors and other factors referred to in Part I, Item 1A. "Risk Factors" in our Form 10-K for our fiscal year ended January 31, 2014 and elsewhere in this Form 10-Q. These factors may cause our actual results to differ materially from any forward-looking statement. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate, and management's beliefs and assumptions. We undertake no obligation to update or revise the statements in light of future developments. In addition, other written or oral statements that constitute forward-looking statements may be made by us or on our behalf. Words such as "expect," "anticipate," "intend," "plan," "believe," "could," "estimate," "may," "target," "project," or variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict.

Business Overview

We are an industry leader in the delivery of multi-screen video headquartered in Acton, Massachusetts. Our products and services facilitate the aggregation, licensing, management and distribution of video (primarily movies and television programming) and television advertising content for cable television system operators and telecommunications companies. We currently operate under one reporting segment.


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During fiscal 2014, we focused on growing our next generation product revenue and continued to execute on our strategy of transitioning to a leading provider of software and services. Our revenue grew from sales of our next generation products to new and existing customers as we rolled out our software product offerings, though these increases were offset by the decline in revenues from some of our legacy products. At the same time, we controlled, and continue to control, our overall cost structure. We implemented our strategy through the following actions:

Continuing to realign our research and development resources to focus on the next generation software platforms, by increasing our investment in our software products for multi-screen video and advertising platforms and video gateway software, while reducing or ending our development in certain legacy product lines and divesting non-core business units and assets. We also announced design wins worldwide for these new products as we help our customers achieve their goals of reducing operating and capital costs as well as customer churn;

Providing comprehensive capabilities in system integration, implementation and custom engineering and easing complex multi-vendor deployments; and

Expanding our product and service offerings, as we are taking on the primary system integrator role and creating new video-on-demand ("VOD") and multi-screen opportunities through our managed services.

Our focus in fiscal 2015 will be:

Increasing our next generation product revenues from sales to new customers by expanding to new and adjacent markets and increasing our selling efforts into new geographical areas;

Continuing to upgrade our existing customers to next generation products; and

Enabling our customers in their capacity as service providers to increase average revenue per subscriber, reduce operating and capital expenses, and lower customer churn with quality products and superior customer service.

We continue to experience fluctuations in our revenues from quarter to quarter due to the following factors:

Budgetary approvals by our customers for capital purchases;

The ability of our customers to process the purchase order within their organization in a timely manner;

Availability of the product;

The time required to deliver and install the product;

The customer's acceptance of the products and services; and

Declines in sales of legacy products.

In addition, many customers may delay or reduce capital expenditures. This, together with other factors, could result in the reductions in sales of our products, longer sales cycles, difficulties in collection of accounts receivable, a longer period of time before we may recognize revenue attributable to a sale, excess and obsolete inventory, gross margin deterioration, slower adoption of new technologies and increased price competition.

Our operating results are significantly influenced by a number of factors, including the mix of products sold and services provided, pricing and costs of materials used in our products. We price our products and services based upon our costs and consideration of the prices of competitive products and services in the marketplace. We expect our financial results to vary from quarter to quarter and our historical financial results are not necessarily indicative of future performance. In light of the higher proportion of our international business, we expect movements in foreign exchange rates will have greater impact on our financial condition and results of operations in the future.


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Results of Operations

The following discussion summarizes the key factors our management believes are necessary for an understanding of our consolidated financial statements.

Revenues

The following table summarizes information about our revenues for the three
months ended April 30, 2014 and 2013:



                                               Three Months Ended              Increase/           Increase/
                                                   April 30,                   (Decrease)          (Decrease)
                                             2014               2013            $ Amount            % Change
                                                   (Amounts in thousands, except for percentage data)
Software Revenues:
Product                                   $     5,058         $ 14,808        $     (9,750 )             (65.8 %)
Service                                        19,279           20,744              (1,465 )              (7.1 %)

Total revenues                                 24,337           35,552             (11,215 )             (31.5 %)

Cost of product revenues                        1,814            2,971              (1,157 )             (38.9 %)
Cost of service revenues                       11,632           13,497              (1,865 )             (13.8 %)

Total cost of revenues                         13,446           16,468              (3,022 )             (18.4 %)

Gross profit                              $    10,891         $ 19,084        $     (8,193 )             (42.9 %)

Gross product profit margin                      64.1 %           79.9 %                                 (15.8 %)
Gross service profit margin                      39.7 %           34.9 %                                   4.7 %
Gross profit margin                              44.8 %           53.7 %                                  (8.9 %)

Product Revenue. Product revenue decreased $9.8 million, or 66%, in the first quarter of fiscal 2015, as compared to the first quarter of fiscal 2014, due to a $5.3 million decrease from our legacy middleware product line, a $1.7 million decrease in our legacy VOD streamer and multi-screen video products. In addition, there was a $2.8 million decrease in our next generation product, primarily due to a delay in receiving customer acceptances and timing of customer orders in the Americas.

Service Revenue. Service revenue for the three months ended April 30, 2014 decreased $1.5 million, or 7%, as compared to the same period of fiscal 2014, primarily due to lower video gateway software professional service revenues.

For the first quarters of fiscal 2015 and fiscal 2014, two customers accounted for 38% and 47% of our total revenues, respectively. We believe that a significant amount of our revenues will continue to be derived from a limited number of customers.

International sales accounted for 45% and 57% of total revenues in the first quarter of fiscal 2015 and fiscal 2014, respectively. We believe that international product and service revenues will continue to be a significant portion of our business in the future.

Gross Profit and Margin. Cost of product revenues consists primarily of the cost of purchased material components and subassemblies, labor and overhead relating to the final assembly and testing of complete systems and related expenses, and labor and overhead costs related to software development contracts. Our gross profit margin decreased approximately nine percentage points for the three months ended April 30, 2014 as compared to the same period of the prior fiscal year. This decrease in gross profit margin was primarily due to the following:

A 16 percentage point decrease in gross product profit margin to 64% primarily due to a mix of higher hardware product revenues compared to prior year; and

A five percentage point increase in gross service profit margin to 40% compared to the same period of fiscal 2014, primarily due to a mix of lower video gateway software revenues, as mentioned above, which typically carry lower margins.


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Operating Expenses

Research and Development

The following table provides information regarding the change in research and
development expenses during the periods presented:



                                              Three Months Ended               Increase/          Increase/
                                                   April 30,                   (Decrease)         (Decrease)
                                             2014               2013            $ Amount           % Change
                                                  (Amounts in thousands, except for percentage data)
Research and development expenses        $     10,928         $  9,692        $      1,236              12.8. %
% of total revenues                              44.9 %           27.3 %

Research and development expenses consist primarily of employee costs, which include salaries, benefits and related payroll taxes, depreciation of development and test equipment and an allocation of related facility expenses. During the three months ended April 30, 2014, research and development costs increased $1.2 million primarily related to our continued investment in our Nucleus product line.

Selling and Marketing

The following table provides information regarding the change in selling and
marketing expenses during the periods presented:



                                               Three Months Ended               Increase/          Increase/
                                                   April 30,                   (Decrease)         (Decrease)
                                            2014                2013            $ Amount           % Change
                                                  (Amounts in thousands, except for percentage data)
Selling and marketing expenses           $     3,438          $   3,602        $      (164 )             (4.6 %)
% of total revenues                             14.1 %             10.1 %

Selling and marketing expenses consist primarily of payroll costs, which include salaries and related payroll taxes, benefits and commissions, travel expenses and certain promotional expenses. Selling and marketing expenses decreased $0.2 million, or 5%, in the first three months of fiscal 2015, when compared to the same period of fiscal 2014 due to a reduction in commissions due to lower revenues in the first quarter of fiscal 2015, as compared to the first quarter of fiscal 2014.

General and Administrative

The following table provides information regarding the change in general and
administrative expenses during the periods presented:



                                               Three Months Ended               Increase/          Increase/
                                                    April 30,                  (Decrease)          (Decrease)
                                             2014                2013           $ Amount            % Change
                                                   (Amounts in thousands, except for percentage data)
General and administrative expenses       $     4,016          $  4,967        $      (951 )             (19.1 %)
% of total revenues                              16.5 %            14.0 %

General and administrative expenses consist primarily of employee costs, which include salaries and related payroll taxes and benefit-related costs, legal and accounting services and an allocation of related facilities expenses. General and administrative expenses decreased $1.0 million, or 19%, in the first quarter of fiscal 2015, as compared to the same period of fiscal 2014 primarily due to lower employee-related costs.


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Amortization of Intangible Assets

The following table provides information regarding the change in amortization of
intangible assets expenses during the periods presented:



                                               Three Months Ended               Increase/          Increase/
                                                    April 30,                   (Decrease)         (Decrease)
                                             2014                2013            $ Amount           % Change
                                                   (Amounts in thousands, except for percentage data)
Amortization of intangible assets         $     1,779          $  1,149        $        630              54.8. %
% of total revenues                               7.3 %             3.2 %

Amortization expense is primarily related to the costs of acquired intangible assets. Amortization is also based on the future economic value of the related intangible assets which is generally higher in the earlier years of the assets' lives. During the three months ended April 30, 2014 and 2013, we incurred amortization expense of $0.3 million which was charged to cost of sales. Additionally, for this same period of fiscal 2015, we recorded amortization expense of $1.5 million in operating expenses, compared to $0.8 million for the same period of fiscal 2014.

Stock-based Compensation Expense

The following table provides information regarding the change in stock-based
compensation expense during the periods presented:



                                              Three Months Ended              Increase/          Increase/
                                                  April 30,                  (Decrease)          (Decrease)
                                            2014               2013           $ Amount            % Change
                                                 (Amounts in thousands, except for percentage data)
Stock-based compensation expense         $      596          $  1,113        $      (517 )             (46.5 %)
% of total revenues                             2.4 %             3.1 %

Stock-based compensation expense is related to the issuance of stock grants to our employees, executives and members of our Board of Directors. Stock-based compensation expense decreased $0.5 million during the three months ended April 30, 2014, as compared to the same period of fiscal 2014, primarily due to costs incurred in fiscal 2014 related to market-based options held by our Chief Executive Officer, which were fully vested after the first quarter of fiscal 2014.

Professional Fees-Acquisitions, Divestitures, Litigation, and Strategic
Alternatives

The following table provides information regarding the change in professional
fees expenses associated with acquisitions, divestitures, litigation and
strategic alternatives during the periods presented:



                                            Three Months Ended              Increase/          Increase/
                                                April 30,                  (Decrease)          (Decrease)
                                          2014               2013           $ Amount            % Change
                                               (Amounts in thousands, except for percentage data)
Professional fees: acquisitions,
divestitures, litigation and
strategic alternatives                 $      102           $   495        $      (393 )             (79.4 %)
% of total revenues                           0.4 %             1.4 %

Professional fees in the first quarter of fiscal 2015 decreased $0.4 million when compared to the same period of fiscal 2014.


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Severance and Other Restructuring Costs

The following table provides information regarding the change in severance and
other restructuring costs during the periods presented:



                                                  Three Months Ended                Increase/         Increase/
                                                       April 30,                   (Decrease)        (Decrease)
                                               2014                 2013            $ Amount          % Change
                                                     (Amounts in thousands, except for percentage data)
Severance and other restructuring costs     $       474           $     229        $       245              >100 %
% of total revenues                                 1.9 %               0.6 %

Severance and other restructuring costs increased $0.2 million for the three months ended April 30, 2014, as compared to the same period of 2013. During the first quarter of fiscal 2015, a majority of these costs incurred were severance charges related to the departure of 21 employees. This is compared to severance charges of $0.2 million in the first quarter of fiscal 2014 related to seven former employees.

Other Income (Expenses), Net

The table below provides detail regarding our other income (expenses), net:



                                                Three Months Ended               Increase/          Increase/
                                                    April 30,                   (Decrease)         (Decrease)
                                             2014               2013             $ Amount           % Change
                                                   (Amounts in thousands, except for percentage data)
Loss on sale of equity investment         $        -         $       (67 )      $        67           (100.0%)
Interest income, net                               84                 30                 54             >100%
Foreign exchange gain (loss)                      331               (479 )              810            >(100%)
Miscellaneous income                               -                  51                (51 )         (100.0%)

                                          $       415        $      (465 )      $       931

Foreign exchange gain (loss). Foreign exchange gains and losses result from changes in exchange rates between the U.S. Dollar and foreign currencies during the periods presented.

Income Tax Benefit



                              Three Months Ended              Increase/       Increase/
                                   April 30,                 (Decrease)      (Decrease)
                             2014               2013          $ Amount        % Change
                               (Amounts in thousands, except for percentage data)
   Income tax benefit    $       (234 )        $  (241 )     $         7            (2.9 %)
   % of total revenues           (1.0 %)          (0.7 %)

For the three months ended April 30, 2014, we recorded an income tax benefit of $0.2 million on a loss before tax of $9.7 million. This represents an estimated annual effective tax rate of 12% attributable to profitable foreign operations or jurisdictions where losses can, more likely than not, be benefitted. Our effective tax rate of 12% was based on the full fiscal year estimates for fiscal 2015. Our benefit is affected by geographic jurisdiction in which a worldwide income or loss has been incurred, resulting in the difference between the federal statutory rate of 35% and the forecasted effective tax rate.

Our effective tax rate in fiscal 2015 and in future periods may fluctuate on a quarterly basis as a result of changes in the valuation of our deferred tax assets, changes in actual results versus our estimates, or changes in tax laws, regulations, accounting principles, or interpretations thereof. We regularly review our tax positions in each significant taxing jurisdiction in the process of evaluating our unrecognized tax benefits. We make adjustments to our unrecognized tax benefits when: i) facts and circumstance regarding a tax position change, causing a change in management's judgment regarding that tax position; ii) a tax position is effectively settled with a tax authority; and/or
iii) the statute of limitations expires regarding a tax position.


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We continue to maintain a valuation allowance against deferred tax assets where realization is not certain. We periodically evaluate the likelihood of the realization of deferred tax assets and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized.

Non-GAAP Measures.

We define non-GAAP (loss) income from operations as U.S. GAAP operating loss plus stock-based compensation expenses, amortization of intangible assets, earn-outs and change in fair value of earn-outs, professional fees associated with acquisitions, divestitures, litigation and strategic alternatives and severance and other restructuring costs. We define adjusted EBITDA as U.S. GAAP operating loss before depreciation expense, amortization of intangible assets, stock-based compensation expense, inventory write-downs, earn-outs and change in fair value of earn-outs, professional fees associated with acquisitions, divestitures, litigation and strategic alternatives, and severance and other restructuring costs. We discuss non-GAAP (loss) income from operations in our quarterly earnings releases and certain other communications as we believe non-GAAP operating (loss) income from operations and adjusted EBITDA are both important measures that are not calculated according to U.S. GAAP. We use non-GAAP (loss) income from operations and adjusted EBITDA in internal forecasts and models when establishing internal operating budgets, supplementing the financial results and forecasts reported to our Board of Directors, determining a component of bonus compensation for executive officers and other key employees based on operating performance and evaluating short-term and long-term operating trends in our operations. We believe that non-GAAP (loss) income from operations and adjusted EBITDA financial measures assist in providing an enhanced understanding of our underlying operational measures to manage the business, to evaluate performance compared to prior periods and the marketplace, and to establish operational goals. We believe that these non-GAAP financial adjustments are useful to investors because they allow investors to evaluate the effectiveness of the methodology and information used by management in our financial and operational decision-making.

Non-GAAP (loss) income from operations and adjusted EBITDA are non-GAAP financial measures and should not be considered in isolation or as a substitute for financial information provided in accordance with U.S. GAAP. These non-GAAP financial measures may not be computed in the same manner as similarly titled measures used by other companies. We expect to continue to incur expenses similar to the financial adjustments described above in arriving at non-GAAP
(loss) income from operations and adjusted EBITDA, and investors should not infer from our presentation of this non-GAAP financial measure that these costs are unusual, infrequent or non-recurring.


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The following table includes the reconciliations of our U.S. GAAP loss from operations, the most directly comparable U.S. GAAP financial measure, to our non-GAAP (loss) income from operations and the reconciliation of our U.S. GAAP loss from operations to our adjusted EBITDA for the three months ended April 30, 2014 and 2013 (amounts in thousands, except per share and percentage data):

                                                            Three Months Ended                                           Three Months Ended
                                                              April 30, 2014                                               April 30, 2013
                                               GAAP                                                         GAAP
                                            As Reported           Adjustments         Non-GAAP           As Reported           Adjustments         Non-GAAP
Revenues:
Products                                   $       5,058         $          -         $   5,058         $      14,808         $          -         $  14,808
Services                                          19,279                    -            19,279                20,744                    -            20,744

Total revenues                                    24,337                    -            24,337                35,552                    -            35,552

Cost of revenues:
Products                                           1,544                    -             1,544                 2,658                    -             2,658
Services                                          11,595                    -            11,595                13,443                    -            13,443
Amortization of intangible assets                    270                  (270 )             -                    313                  (313 )             -
Stock-based compensation                              37                   (37 )             -                     54                   (54 )             -
. . .
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